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Winning trades rarely stay winning indefinitely. So anyone heavily invested in stocks or bonds that throw off lots of cash—whether through interest income or dividends—should beware of the abundant signs of frothiness.

Sectors with the highest dividends are trading at rich premiums to the broad market, relative to the historical norms, warns Vadim Zlotnikov, chief market strategist at AllianceBernstein. He studied the price-to-book and enterprise value-to-Ebit (earnings before interest and taxes) ratios of industry sectors relative to the broad market over the past 30 years, and found that sectors paying the highest dividends are fetching some of the highest prices they've ever reached in this stretch.

Utility stocks, which yield about 4%, are more expensive than they have been roughly 90% of the time. Likewise, telecoms, which yield about 4.5%, are costlier than they have been about 80% of the time. The consumer-staples sector, which yields north of 3%, is in nosebleed territory, too: Its valuation is higher than it has been in almost 90% of its history.

Conversely, health-care services, autos, housing, and tech shares, each with about 1%-1.5% dividend yields, have been cheaper only 30% of the time. Zlotnikov believes that yields explain about 50% of the valuation discrepancy. "The demand for short-term stable income is overwhelming the demand for long term gains," he says. "The risk of owning these [dividend-paying] stocks is that they are 20% to 25% overvalued," and any increase in inflation or bond yields could cause them to tumble.

This isn't news to analysts covering high-yielding industries. Based on 10-year averages, the S&P utilities index, which boasts a 15.1 forward price/earning multiple versus its usual 14, fetches an 8% premium. In contrast, the Standard &Poor's 500 trades at a 14% discount—with a 13.6 P/E compared with its 15.9 norm, notes Andrew Pusateri, a senior utilities analyst at Edward Jones.

Within the sector,
Southern Co.SO -0.11279043537108054%Southern Co.U.S.: NYSEUSD44.28
-0.05-0.11279043537108054%
/Date(1427835827141-0500)/
Volume (Delayed 15m)
:
5606082AFTER HOURSUSD44.283
0.003000000000000110.006775067750677507%
Volume (Delayed 15m)
:
182485
P/E Ratio
20.12727272727273Market Cap
40334892994.7717
Dividend Yield
4.742547425474255% Rev. per Employee
700330More quote details and news »SOinYour ValueYour ChangeShort position
(ticker: SO) may be the poster child for the demand-for-income phenomenon. It yields 4.3% and changes hands at 17.4 times estimated 2012 earnings, even though its profits are growing at only 3% annually. "They are a large company, with a solid track record and an above-average dividend yield. Investors view it as a safe investment and Southern tends to outperform when there is a flight to safety," says Pusateri, who has a Sell rating on the stock.

Southern's counterpart among telecoms probably is
VerizonVZ -0.997557003257329%Verizon Communications Inc.U.S.: NYSEUSD48.63
-0.49-0.997557003257329%
/Date(1427835638700-0500)/
Volume (Delayed 15m)
:
12352840AFTER HOURSUSD48.63
%
Volume (Delayed 15m)
:
407334
P/E Ratio
19.297619047619047Market Cap
204113646499.045
Dividend Yield
4.523956405511002% Rev. per Employee
716746More quote details and news »VZinYour ValueYour ChangeShort position
(VZ). It yields 4.6% and trades at 17.3 times 2012 earnings estimates. Verizon's overall revenue is climbing at less than 2% a year. Normally, that would relegate it to trading at a discount to the broader market, says Craig Moffett, a senior analyst at Sanford C. Bernstein, who rates the stock Underperform. But, he observes, "because of the thirst for yield, Verizon fetches a 25% premium." (The stock also is aided by Verizon's lack of exposure to Europe.) If the shares were to return to their historical relative multiple, they would be around $31, roughly 28% below Friday's $43.17 close, he estimates.

Dividend-yielding stocks undoubtedly will retain their premiums as long as funds flow into the sector. This year, dividend and equity-income mutual funds have taken in more than a net $13.6 billion, putting them on pace to match last year's monster $18.9 billion. Earlier in the decade, cash flows ranged from outflows of $5.2 billion in 2008 to inflows of $5.1 billion in 2003, according to Morningstar.

Closed-end funds also have benefited from the search for income. Domestic closed-end bond funds trade at premiums to their net asset value, while equity funds sell at a discount, according to Cecilia Gondor, an analyst with Thomas J. Herzfeld Advisors, a closed-end specialist in Miami. The bond-fund valuations have helped 50% of all closed-ends trade at a premium to their net asset value. The number hit 43% in 2010, but has usually bounced between 25% and 35% since 1995, she adds.

AllianceBernstein's Zlotnikov recommends investing 5% to 10% of a portfolio in ultra-cheap, high-beta stocks negatively correlated with dividend-paying issues. In other words, go for the most out-of-favor stocks in the commodities, semiconductor, consumer-durable, oil-services or financial sectors. Another suggestion: Make sure that your dividend-stock portfolio is diversified, because when earnings disappoint, individual stocks have been falling by 5% to 10%. Lastly, consider buying dividend funds that don't boast the top yields. These may own less expensive stocks or shares that have room to boost their payouts.